While legislative leaders in the Kentucky House and Senate have floated the idea of eliminating Kentucky’s corporate income tax, a new report shows that such a move is likely to harm Kentucky’s growth and development while letting corporations off the hook for the public investments from which they benefit.
Corporate taxes are already in decline in Kentucky, falling from nearly 12 percent of the state’s General Fund in 1989 to around five percent this year. But the state has not reaped economic benefits — a recent Census Bureau report put Kentucky’s poverty rate higher than every state but Mississippi and Arkansas.
Promoting job creation is one of the state’s most important roles, but the best tools to do that are investment in education, infrastructure, health and human services, and other areas. There is abundant evidence that more corporate tax cuts are not worth their cost.
The report notes that eliminating the corporate income tax or cutting it further is unlikely to generate economic gains for Kentucky in part because it is such a small part of the cost of doing business. Analysis using IRS and other data suggest the corporate income tax makes up less than a quarter of one percent of the cost of doing business in the state.
Serious academic research shows a weak relationship between cutting business taxes and growing economies. On the other hand, there is significant evidence that cost-effective investment in public services is important to long-term economic growth.
Rather than eliminating or cutting corporate taxes, the report recommends closing loopholes and more carefully scrutinizing corporate tax breaks in order to shore up revenue and assure the tax is applied fairly.
The report can be accessed here.
Jason Bailey is the director of the Kentucky Center for Economic Policy.
Taxes on corporations help pay for needed investments in education, infrastructure and other areas. Yet some legislative leaders have floated the idea of eliminating the corporate income tax. Rather than spurring economic growth, cutting corporate taxes harms states’ ability to make investments critical to creating jobs. Instead, the state should address loopholes and more closely scrutinize tax breaks that limit corporate tax revenues.
Ten years ago, large federal tax cuts were signed into law by President Bush. Those cuts are now set to expire at the end of 2012. Extending them beyond that date would almost double the size of the federal budget deficit, and in Kentucky close to half of the tax cuts from an extension would go to the highest-earning five percent of taxpayers.